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Morgan Stanley leans on wealth management to beat estimates

FILE PHOTO: The corporate logo of financial firm Morgan Stanley is pictured on the company's world headquarters in New York, U.S. April 17, 2017. REUTERS/Shannon Stapleton

By Aparajita Saxena and Elizabeth Dilts

(Reuters) - Morgan Stanley reported a 9 percent drop in quarterly earnings on Wednesday, but managed to beat analyst estimates through slight growth in its wealth management business, as well as cost cuts.

Shares of the sixth-largest U.S. bank were up 1.4 percent to $47.69 in morning trading.

Morgan Stanley gets about half its annual revenue from wealth management, which helps it ride out weak periods for trading and investment banking. Both of those businesses suffered during the first quarter at Morgan Stanley and its Wall Street rivals because of subdued volatility.

"This quarter ... shows the resiliency of wealth management, which is an important indicator of the health of our business," Chief Financial Officer Jonathan Pruzan said in an interview.

The bank also cut non-interest expenses by 4 percent, which helped boost its bottom line.

Overall, Morgan Stanley reported a quarterly profit of $2.34 billion, or $1.39 per share, down from $2.58 billion, or $1.45 per share, in the year-earlier period. Excluding items, the company earned $1.33 per share.
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Its revenue fell 7 percent to $10.29 billion.

Both metrics still beat Wall Street expectations. Analysts had estimated earnings of $1.17 per share and revenue of $9.93 billion, according to IBES data from Refinitiv.

Wealth management revenue rose slightly from a year ago, with profit margins holding steady at 27 percent. But the business looks robust compared with institutional securities, analysts said. That unit reported steep declines across trading, underwriting and investment banking.

"Wealth management was able to protect the margin in a tougher backdrop" than the year-ago period, Evercore ISI analyst Glenn Schorr wrote in a note to clients. The performance "should make people more optimistic considering the lift in markets and better underwriting environment lately."

Concerns about a slowing global economy, U.S. trade tensions with China and the Federal Reserve's interest rate policy spurred worries of recession risk early in 2019. But those concerns seem to have subsided, Pruzan said.

Morgan Stanley's wealth management profit margin and its return on equity of 13.1 percent were comfortably within the targeted range Chief Executive James Gorman has set. Investors watch that return figure closely, because it measures how much profit a bank produces from shareholder capital.

Gorman, who took the helm in 2010, has defined his tenure by building out the wealth management business, dialing back bond trading and generally reducing risk across the franchise.

Like in previous quarters, an analyst asked Gorman on a conference call why he has not lifted performance targets for wealth management, given how easily the business has been meeting the 26 percent to 28 percent range he set.

Gorman again reminded analysts that the margins were far lower when he first set about growing the wealth unit. But now, the business produces returns of nearly 25 percent in difficult times, and might do better, he said, without raising the target.

"There's no magic to this," said Gorman. "It's pretty consistent."

By contrast, top rival Goldman Sachs Group Inc remains more weighted toward capital markets businesses and is struggling to produce more stable results. On Monday, Goldman reported a 20 percent profit decline and lower revenue across nearly all its major businesses, sending its shares down more than 3 percent.

Gorman explained that the business will help Morgan Stanley interface with roughly 3,000 small companies and 2.5 million individuals. That benefits Morgan Stanley's wealth business, which will oversee the accounts, but also allows the bank to offer cash management services and potentially handle stock offerings for companies that go public.

The transaction is expected to close in May, he said.

(Reporting By Aparajita Saxena in Bengaluru and Eliabeth Dilts in New York; Additional reporting by Anna Irrera; Writing by Lauren Tara LaCapra; Editing by Saumyadeb Chakrabarty and Meredith Mazzilli)